This is a blog that I started in october 2010, mainly for discussing my ideas on the economy, taxation and politics. Please add comments - I'll do my best to reply. If you are new, I would recommend watching one of my YouTube presentations (in French or English). You can download a fully indexed pdf version (over 800 pages) here.

12 Feb 2012

How much will be paid out in Credit Default Swaps if Greece Defaults?

Credit Default Swaps (CDS) allow hedge funds and other actors in the markets to make large amounts of money in the event of a default of an entity that can be a company, or a government. They are a bit like allowing people to take out fire insurance on my house despite the fact that they have nothing to do with me, and don't own my house at all. And, of course, if hundreds of different people have taken out fire insurance on my house, it will hardly be a surprise if one day my house "accidentally" catches fire.

Is this why there is so much pressure on the Greeks to either accept totally outrageous levels of austerity, coupled with interest rates for long-term loans that have just reached 25.91%?

How can we find out how much money has been bet on Greek default? Well, you can access data at the DTCC website - the Depository Trust and Clearing Corporation. Have a look at their Table 6 that gives CDS data for the the top 1000 Reference Entities. You can even download the whole lot as an excel file. They actually provide details about transactions every week. Amazingly upfront, when you think about it.

For the week ending 3rd Feburary 2012, the total Gross Notional amount outstanding was
$14,862,048,912,869 - roughly $14.8 trillion. You can find the amounts for all 1000 entities, one of which is the "HELLENIC REPUBLIC" for which the value is $69,382,164,345 ($69 billion), based on a total of 4,183 contracts.

So, I'm not quite sure how to interpret these numbers, but it looks that there are maybe over 4000 people/hedge funds that are looking forward to cashing in their cheques for $69 billion if they can get the Greeks to blink in this very dangerous game of poker that is being played on the world stage.

And who will be paying the $69 billion? Anyone like to guess that the banks that have been taken on the bets will need taxpayers to pick up the bill?

If you're interested here are the top countries for Credit Default Swaps on their Sovereign Debt. Looks like the hedge funds may be bettting on Italy and Spain too...